A Full Agenda for the International Container Trades
By William P. Doyle
The past couple of months have been chock-a-block full of maritime activity in the international container trades.
As the Big-3 Japanese Lines remain still on track to spin-off their container business units into a single standalone container carrier company, some delayed merger and acquisition activity is finally moving ahead. Separately, Congress has taken a keen interest in the Shipping Act.
On May 2, 2017, the U.S. Federal Maritime Commission (FMC), unanimously voted to reject the Tripartite Agreement proposed by Kawasaki Kisen Kaisha, Ltd. (K Line); Mitsui O.S.K. Lines Ltd. (MOL); and Nippon Yusen Kaisha (NYK). This agreement was styled as a joint venture seeking to comply with joint venture regulations under the jurisdiction of the FMC.
The decision by the FMC in no way precludes the Japanese carriers from merging their container trade business units into a single stand-alone company. Rather, the vote recognizes that the FMC cannot approve certain actions that would allow the three Japanese companies to act as a merged entity prior to actually merging. That’s because The Shipping Act does not provide the Federal Maritime Commission with authority to review and approve mergers.
Simply stated, the parties forming the joint venture retain their corporate identities and provide assets into the venture. Here, the Japanese Lines’ stated goal was to break away from their parent companies and form a standalone container carrier company, thus jettisoning their corporate identities. In essence, what the companies were seeking was to front-run the company well ahead of any actual merger. In order to receive the benefits of a merger, one needs to first merge. The Commission has continuing regulatory oversight on agreements between established ocean common carriers and marine terminal operators.
Much of what the Tripartite parties were asking for revolved around pre-merger or pre-consolidation coordination. For instance, the parties were seeking authority to share information and conduct joint negotiations with third party businesses in the United States for as much as year in advance of any potential merger. Under the general antitrust laws, ‘gun jumping’ is forbidden and so is the practice of sharing competitive information or the premature combining of parties.
In addition, this proposed Tripartite Agreement sought authority to transfer shares or ownership interests in U.S. -based marine terminals owned and/or operated by the Japanese lines. Inasmuch as the pre-coordination activity of the liners is beyond the scope of FMC’s jurisdiction, this same rationale applies to marine terminal assets in the U.S.
Previously, the Competition Commission of Singapore (CCS) approved the proposed joint container shipping venture between Japanese ocean carriers. Singapore granted the approval on March 24, 2017. Interestingly, the same day that the Singaporean approval was announced, the Japanese Lines filed their proposed Tripartite Agreement with the FMC.
The Japanese Lines have moved forward since the FMC’s ruling. In Mid-May, the parties filed a notice with the European Union Commission (EC) that it would be forming a “full-function JV.” The three Japanese companies plan to merge their global container shipping businesses and container terminal businesses, excluding terminals in Japan. The EC is expected to rule on the JV by June 28, 2017.
On May 31, 2017, the Big Three announced that their new company would be named the Ocean Network Express (ONE). Subject to global regulatory approvals, ONE would be headquartered in Singapore, with regional head offices based in Hon Kong, London, Richmond and Sao Paulo. The new entity is expected to remain in a member of THE Alliance along with Germany’s Hapag-Lloyd and Taiwan’s Yang Ming. The parties expect to officially launch the company in April 2018.
It is estimated that ONE would have a collective 1.4 million TEUs of capacity, making it the sixth largest container carrier in the world.
Mergers and Acquisitions
The Maersk Line acquisition of Hamburg Süd was approved by the Board of Directors of both companies on or about April 28, 2017. Completion is subject of approval of regulators. The price approved by the both companies is 3.7 billion EUR (or about $4 billion USD). In April 2017, the European Commission cleared the proposed acquisition of Germany’s Hamburg Süd by Maersk Line, subject to certain conditions including selling off Maersk’s Mercosul Line. Mercosul is a Brazilian cabotage trade operator.
Keeping Mercosul Line under the Maersk umbrella would have given Maersk Line an 80 percent share of trade to Brazil because Hamburg- Süd’s ownership of Aliança Navegaçao. Maersk’s Mercosul currently has 21 percent share, while Aliança claims 59 percent in the trade. Moreover, conditions of the approval require Hamburg Süd to withdraw from five consortia trade routes - Northern Europe and Central America/Caribbean (Eurosal 1/SAWC), Northern Europe and West Coast South America (Eurosal 2/SAWC), Northern Europe and Middle East (EPIC 2), the Mediterranean and West Coast South America (CCWM/Medandes), and the Mediterranean and East Coast South America (MESA).
According to the European Commission’s analysis, the merger would have resulted in anti-competitive effects on the corresponding five trade routes. In particular, these links could have enabled the merged entity to influence key parameters of competition, such as capacity, for a very large proportion of those markets, to the detriment of their commercial customers and, ultimately, of consumers.
The takeover of Hamburg Süd was cleared by the U.S. Department of Justice in March 2017. Maersk intends to maintain the business model of Hamburg Süd as well as the commercial structure in the regions. Upon completion of the deal, several Maersk Line senior executives will join the top management team of Hamburg Süd.
Separately, the merger between Hapag-Lloyd and United Arab Shipping Company (UASC) was completed. The merged entity will become one top-5 largest container carriers in the world. Its fleet will comprise over 230 vessels, with a total capacity of 1.6 million transporting over 10 million TEU a year on global trade lanes.
UASC was established in 1976 by six Persian Gulf states: Bahrain, Iraq, Kuwait, Qatar, Saudi Arabia and United Arab Emirates. Qatar Investment Authority and Public Investment Fund of the Kingdom of Saudi Arabia (PIF) are currently UASC’s two majority shareholders, and will become new key shareholders of Hapag-Lloyd. UASC’s other shareholders, including Kuwait Investment Authority, Iraqi Fund for External Development (IFED), United Arab Emirates and Bahrain’s participation will be reflected with a combined 3.6 percent stake in Hapag-Lloyd in the form of free float shares.
Prior to the merger, UASC was implementing one of the industry’s largest and most technologically advanced new building programs, with 17 newbuilds on order; comprised of six 18,800 TEU and eleven 15,000 TEU containerships. These vessels will be the first ultra large containerships in the industry to be delivered ‘LNG ready’; enabling the future use of dual fuel main engine technology.
Maersk is party to the 2M Alliance with Mediterranean Shipping Company (MSC).
Hamburg Süd who had not previously been party to one of the major Alliances will now be a member of 2M by virtue of its acquisition by Maersk. Hapag Lloyd is a member of the OCEAN Alliance with China Ocean Shipping and CMA CGM. UASC through merging with Hapag Lloyd will be subsumed into the OCEAN Alliance.
On the Hill
Both the U.S. House of Representatives and the U.S. Senate have been actively involved with shipping matters this year. As requested by House and Senate leaders, I participated in several rounds of discussions and drafting reviews throughout the legislative process. That legislative activity from the appropriate Committees in the Senate and House is outlined to follow:
U.S. Senate: Federal Maritime Commission Authorization Act of 2017 (Approved May 18 in the Senate Commerce, Science and Transportation Committee)
- Preventing deceptive practices: clarifies that a person “may not act, including holding itself out by solicitation, advertisement, or otherwise, as an ocean transportation intermediary unless the person holds an ocean transportation license issued by the Federal Maritime Commission.”
- Financial responsibility: clarifies that “A person may not act, including holding itself out by solicitation, advertisement, or otherwise as an ocean transportation intermediary unless the person furnishes a bond, proof of insurance, or other surety—“
- Reports filed with the Commission: Expands the ability of the Federal Maritime Commission to require not just from common carriers but also from marine terminal operators, filing with the Commission of periodical or special reports, an account, record, rate, or charge, or a memorandum of facts and transactions related to the business of the marine terminal operator, as applicable.
- Treatment of tug operators: expands the exception to the exemption from antitrust laws to include tug operators under § 40307(b) – “This part does not extend antitrust immunity to – (1) an agreement with or among air carriers, rail carriers, motor carriers, tug operators or common carriers by water not subject to this part relating to transportation within the United States;”
- Treatment of tug operators: amends § 41105(4) to read: (4) negotiate with a tug operator, non-ocean carrier or group of non-ocean carriers (such as truck, rail, or air operators) on any matter relating to rates or services provided to ocean common carriers within the United States by those tug operators or non-ocean carriers, unless the negotiations and any resulting agreements are not in violation of the antitrust laws and are consistent with the purposes of this part, except that this paragraph does not prohibit the setting and publishing of a joint through rate by a conference, joint venture, or association of ocean common carriers.”
The Senate Bill can be found here.
U.S. House of Representatives: Federal Maritime Commission Authorization Act of 2017, H.R. 2593 (Approved by the House Transportation and Infrastructure Committee on May 24, 2017)
- Defines Port Services as “intermediary services provided to an ocean carrier at a United States port to facilitate vessels operated by such a carrier to operate and load and unload cargo at such port, including towage, cargo handling, and bunkering.’’
- Adds a new prohibition to § 41105 to protect marine terminal operators from concerted action by two or more common carriers that may not: “(9) negotiate with a provider of port services, other than a provider of towing vessel services, on any matter relating to rates or services provided within the United States by such provider, unless advance notice is provided to the Federal Maritime Commission of the intent and need for the negotiation, the negotiation and any resulting agreement are not in violation of the antitrust laws and are consistent with the purposes of this part, and, as determined by the Commission, the negotiation and any resulting agreement will not substantially lessen competition in the purchasing of port services provided at United States ports (this paragraph does not prohibit the setting and publishing of a joint through rate by a conference, joint venture, or association of common carriers).”
- Adds a new prohibition to § 41105 to protect domestic tug operators from a group of two or more common carriers that may not: ‘‘(10) negotiate with a provider of towing vessel services on any matter relating to rates or services provided within the United States by towing vessels.’’
- Amends § 41307(b): (b) Reduction in Competition. — (1) Action by commission. — If, at any time after the filing or effective date of an agreement under chapter 403 of this title, the Commission determines that the agreement is likely, by a reduction in competition, to produce an unreasonable reduction in transportation service, produce an unreasonable increase in transportation cost, or substantially lessen competition in the purchasing of port services the Commission, after notice to the person filing the agreement, may bring a civil action in the United States District Court for the District of Columbia to enjoin the operation of the agreement. The Commission’s sole remedy with respect to an agreement likely to have such an effect is an action under this subsection.
- Adds at the end of § 41307(b) a provision that allows the FMC to consider a party’s other agreements, when considering a pending agreement: ‘‘(4) COMPETITION FACTORS. —In making a determination under this subsection, the Commission may consider any relevant competition factors in affected markets, including, without limitation, the competitive effect of agreements other than the agreement under review.’’
- Reports filed with the Commission: amends § 40104(a) and expands the ability of the Federal Maritime Commission to require not just from common carriers but also from marine terminal operators and ocean transportation intermediaries (Senate bill does not include OTIs) to file with the Commission a periodical or special report, an account, record, rate, or charge, or a memorandum of facts and transactions.
- Amends the OTI license requirement found in § 40901(a) and clarifies that: “A person in the United States may not advertise, hold oneself out, or act as an ocean transportation intermediary unless the person holds an ocean transportation intermediary’s license issued by the Federal Maritime Commission.” Also amends § 40902(a) with a similar prohibition.
- Interrelated agreements: Amends § 41104 and adds that a common carrier, either alone or in conjunction with any other person, directly or indirectly, may not: (13) participate in a rate discussion agreement and a vessel sharing agreement, slot sharing agreement, space sharing agreement, or similar agreement for use of vessels by two or more ocean common carriers, unless the Commission has granted the parties an exemption pursuant to section 40103. Carriers in prohibited agreements in effect on the date of enactment shall have 1 year from such date of enactment to either (1) obtain an exemption from the application of section 41104(13) of title 46, United States Code, or (2) withdraw from the agreement as necessary to comply with the section 41104(13).
The next steps include the full House and Senate to vote on their respective versions of the bills. Thereafter, both chambers should conference the bills and iron out any inconsistences between the bills, eventually resulting in a final bill that could become new legislation.
William P. Doyle is a Commissioner with the U.S. Federal Maritime Commission. The FMC, among other things, regulates liner companies, ocean transportation intermediaries and marine terminal operators.
The thoughts and comments he expresses here are his own and should not be construed to represent the position of the Commission or his fellow Commissioners.
(As published in the May/June 2017 edition of Maritime Logistics Professional)
Other stories from May/Jun 2017 issue
- A Full Agenda for the International Container Trades page: 10
- Port and Environmental Regulations: Charting the Best Route page: 14
- Digging Deep for Good News page: 15
- Navigating the Rough Waters of Misclassification page: 17
- A Location Strategy for Funding Port Infrastructure page: 20
- Ports Ponder Public Private Partnerships page: 24
- The Port of Corpus Christi: Energy Port of the Americas page: 30
- Turnkey Logistics: The Crowley Way page: 40